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India: Utilities: Power - Generation
Equity Research
SEB Health-check 1: Tamilnadu: Losses peaked, tariff hike imminent
State electricity boards(SEB) health check; starting with Tamilnadu
We believe weak finances of state owned utilities will remain a key overhang
on the sector and reason for our cautious stance. We are meeting regulators
and various officials of state boards to assess current loss levels, underlying
reasons and corrective measures that states plan to take to improve their
finances. We started with Tamilnadu (TN) which is one of highest loss making
state boards in India and consumes 9.3% of total power generated in India.
Efficient, but not making money; accumulated losses of ~US$6-7bn
TN has low AT&C losses (19% for FY09 vs national average of 26%) and
has almost 100% collection efficiency. Absence of tariff revision for 2003-
2010 coupled with dependence on expensive sources of power supply is
primary reason for peak losses in FY11, in our view. With availability of
cheaper power over next 2 years, we believe the revenue gap may narrow.
Tariff hike imminent after elections; losing about US$4mn/day
With debt of about US$7-8bn as of FY11 (debt:equity 12:1, debt:net fixed assets
2:1) and TN losing about US$4mn/day on average due to high cost of power
purchase, we believe a tariff hike is imminent after elections in April 2011.
While tariff hike at single instance is unlikely, we believe sustained tariff hikes
of 15% per annum over the next 4 years could lead to TN board breaking even.
What if tariff hikes are insufficient and revenue gap continues?
We believe TN board will fund power purchases to the extent it can mobilize
finances through debt route and may resort to load shedding, particularly for
domestic and agricultural customers, in the event of funding drying up.
However, industrial customers may be less impacted, in our view, as TN
board may allow them to use open access mechanism (subject to intra state
transmission constraints) and source power from generators.
OGPL, JSW & Lanco likely to be impacted by weaker finances of
TNEB; have reflected the risk through lower utilization levels
We believe OGPL (having significant exposure to TNEB), Lanco and JSW
Energy will be impacted through lower demand for short term power, increase
in receivables and reduced utilization levels. While OGPL benefits from selling
directly to end customers, we have already reflected the risks to utilization
levels in our EPS estimates for other stocks. We are 5%/17% below Bloomberg
consensus FY12E/13E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Utilities: Power - Generation
Equity Research
SEB Health-check 1: Tamilnadu: Losses peaked, tariff hike imminent
State electricity boards(SEB) health check; starting with Tamilnadu
We believe weak finances of state owned utilities will remain a key overhang
on the sector and reason for our cautious stance. We are meeting regulators
and various officials of state boards to assess current loss levels, underlying
reasons and corrective measures that states plan to take to improve their
finances. We started with Tamilnadu (TN) which is one of highest loss making
state boards in India and consumes 9.3% of total power generated in India.
Efficient, but not making money; accumulated losses of ~US$6-7bn
TN has low AT&C losses (19% for FY09 vs national average of 26%) and
has almost 100% collection efficiency. Absence of tariff revision for 2003-
2010 coupled with dependence on expensive sources of power supply is
primary reason for peak losses in FY11, in our view. With availability of
cheaper power over next 2 years, we believe the revenue gap may narrow.
Tariff hike imminent after elections; losing about US$4mn/day
With debt of about US$7-8bn as of FY11 (debt:equity 12:1, debt:net fixed assets
2:1) and TN losing about US$4mn/day on average due to high cost of power
purchase, we believe a tariff hike is imminent after elections in April 2011.
While tariff hike at single instance is unlikely, we believe sustained tariff hikes
of 15% per annum over the next 4 years could lead to TN board breaking even.
What if tariff hikes are insufficient and revenue gap continues?
We believe TN board will fund power purchases to the extent it can mobilize
finances through debt route and may resort to load shedding, particularly for
domestic and agricultural customers, in the event of funding drying up.
However, industrial customers may be less impacted, in our view, as TN
board may allow them to use open access mechanism (subject to intra state
transmission constraints) and source power from generators.
OGPL, JSW & Lanco likely to be impacted by weaker finances of
TNEB; have reflected the risk through lower utilization levels
We believe OGPL (having significant exposure to TNEB), Lanco and JSW
Energy will be impacted through lower demand for short term power, increase
in receivables and reduced utilization levels. While OGPL benefits from selling
directly to end customers, we have already reflected the risks to utilization
levels in our EPS estimates for other stocks. We are 5%/17% below Bloomberg
consensus FY12E/13E.
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